Deferred Income Annuities as Longevity Insurance

With retirement costs and life expectancies increasing, the biggest concern for many retirees is the possibility of outliving their income. To address that specific concern, Deferred Income Annuities (DIAs) were introduced as a form of “longevity insurance” in 2012. For retirees who want to maximize their future income, while protecting against extended longevity, DIAs provide an effective solution.

How a Deferred Income Annuity Works

A DIA is similar to a Single Premium Immediate Annuity (SPIA) in that it exchanges a lump sum premium for a guaranteed lifetime payout. The difference is, with an SPIA, the payout starts immediately and continues for the lifetime of the annuitant. With a DIA, the payout is deferred until sometime in the future up to 40 years. The DIAs can be especially effective for retirees who have no need for an immediate income stream and anticipate a bigger need for income in the future.

Income annuities such as SPIAs and DIAs are very appealing to retirees who want more certainty in their retirement income. With a SPIA, the investor can target a specific payout amount which can be guaranteed with an appropriate lumpsum premium amount. Or, the investor can know what payout amount to expect based on the amount of the lumpsum premium invested in the contract. The life insurer applies assumptions such as the current interest rate and the investor’s age and life expectancy to determine the payout amount that can be generated by a lumpsum amount; or, it can determine how much of a lumpsum premium is required to generate a certain payout.

The same is true for a DIA in determining what future payout amount the investor can expect. Using the same assumptions, it can determine how much capital will accumulate over the period of time the income is deferred and the payout amount that will be generated when the payout begins. The retiree will know what he or she can count on in the future.

DIA Payout Increases the Longer You Wait

Because the payout amount is based on your life expectancy, the longer you wait to start taking income from a DIA, the higher your monthly payout amount will be. For example, if you deposit $50,000 into a DIA at age 65 with payments to begin in 15 years at age 80, your monthly payout will be about $1,300 a month. If you wait until age 85 to start receiving income, the monthly payout jumps to $2,475. Because the life insurer guarantees your monthly payout for life, you will continue to receive it if you live beyond your life expectancy. That is the real value of longevity insurance.

Planning Considerations for DIAs

DIAs are ideally suited for retirees who expect to live beyond their life expectancy and who don’t have an immediate need for additional income in the early stage of their retirement. They should also have sufficient assets such that the amount invested in a DIA isn’t needed for income or expenses in the near term.  For most DIA contracts, the lumpsum premium deposit is irrevocably retained by the insurer. However, some contracts offer optional riders (for an extra charge), that allow for the principal amount to be refunded to beneficiaries upon your death or for the monthly income to be paid for a guaranteed period.

The payout options vary among different DIA contracts. Some only offer a single life payout, while others may offer other options, such as joint-life, period certain guarantee, or a period certain with cash refund. Because these additional payout options insure more than one life, choosing one will reduce the monthly payout for the annuitant.

A DIA can provide the certainty that you won’t outlive your income, but they should only be considered, along with the guidance of a retirement income specialist, in the context of an overall retirement income strategy.